It was good to hear David Cameron saying we need to cut out waste and unwanted expenditure, and good that he now recognises that Labour’s spending plans post 2010 are unaffordable. Labour responded in two contradictory ways. They both lied that Tories would cut jobs in front line services, and then said they could find more “Gerschon” style savings by running things better!
As readers of this blog will know, I think the least affordable part of Labour’s spending plans is the purchase of bank shares. The Lib Dems today rightly say the share purchase proposals are not working, before going on to recommend a dearer and worst mess by saying they want the government to go directly into the banking business,lending taxpayers money to companies direct!
There needs to be some clearer thinking how to support and encourage banks to lend more. The government has negated the favourable impact of £37 billion of extra capital for 3 banks, by demanding more capital for any given volume of lending. The regulator, who kept levels of capital too low during the boom has now set them higher to intensify the crunch. The greater regulatory requirements cancel out the extra taxpayer capital.
The government is now trying lower interest rates, printing more pounds, ballooning the Bank of Enngland balance sheeet, guarantees and short term loans on a big scale. These devices should start to loosen the squeeze. However, the potential losses on bank loan books allied to the extra capital requirements laid down by the Regulator mean much less lending than in the bubble days, as you would expect. People should understand that the regulators have called time on easy credit, so we are not going back to 2006 conditions any time soon.
The bank capital issue needs rethinking. Government should reassure markets it stands behind all the major banks with short term loans, guarantees and liquidity.It should renegotiate the share issue and ask the banks to find more of their own extra capital as they can do. At the moment taxpayers are sitting on a loss above £7 billion for no good reason. Anyone who thought £37 billion would fix it did not understand it. The government should start worrying about how easy it would be to lose all that £37 billion, given the scale of the banks balance sheets and the risks being run.